Trust Perspectives: Consistent Strategy Amid Volatility

Today’s Volatile Environment

Today, there is substantial buzz around the volatility of the market. In June, the S&P 500 fell into a bear market, meaning its value declined at least 20% from recent highs. As economists tentatively warn of a recession and pessimistic headlines about markets consume mainstream media, individuals may overlook the fundamentals of financial planning and waver to emotion when managing their money.

With this, many investors fall victim to irrational behavior and may make short-sighted financial changes while unknowingly sacrificing long-term prospects in the process. Potential long-term gains can be hindered by a loss-averse mentality, especially during expected economic downturns. However, successful investors recognize gains and losses are a natural part of one’s financial lifetime. Thus, individuals should act in accordance with the prudent financial plan outlined with their financial advisor.

Controllable and Uncontrollable Factors

Sound financial planning involves recognizing there are aspects of wealth creation that are controllable and others that are uncontrollable.

Investors can strategically plan for saving, spending and allocating assets based off of one’s expected lifetime earnings and career trajectory – these are controllable. Successful investors:

  1. Create a budget to ensure income and expenses are aligned with their long-term financial goals.
  2. Implement a strategic and consistent asset allocation adjusted for an individual’s age and risk tolerance.
  3. Focus on managing an investment portfolio to opportunistically rebalance and harvest tax losses.

Conversely, stock and bond market performance, macroeconomic environments, geopolitics and underlying business fundamentals are all largely uncontrollable. With the recent market downturn, continued rate hikes by the Fed and inflationary pressures driving the price of commodities (e.g., gas & oil), it is understandable why these uncontrollable factors have garnered attention.

However, successful investors remain disciplined and focused on controllable factors during these time periods. While some may be tempted to pull out of the stock market all together, history tells us that bear markets are relatively short-lived.  Further, selloffs as a result of geopolitical turmoil tend to be even more short-lived. While today’s headwinds are defined by a multi-dimensional set of economic and geopolitical challenges, remember that both the markets and the nation have withstood the Great Depression, a pair of World Wars, a nuclear crisis and a whole host of other challenging events.

Ultimately, individuals must remain confident in their financial plan that is designed to grow across a long-term horizon, and investors will weather these adverse economic times just as before.